Wealth and Knowledge

Many of you might believe wealthy people all have high IQs, or all people with high IQs are really wealthy (or ought to be).  What might surprise you is how many regular people just like you are are wealthy.

IQ is not a determining factor in one’s ability to acquire wealth.

In fact, acquiring and maintaining wealth has very little to do with head knowledge, and much more to do with behavior.  Disciplined behavior trumps a know-it-all every time.

Smart people regularly do stupid things with money and wealth, often losing everything.  Why?  Because they fool themselves into believing they are smarter than the market and everyone else, and there is no way they can lose.  More often there is no way they will win.

Yes, there are some rare individuals who are smart and disciplined and hit the jackpot, but they are extremely rare, and would be the first to admit they are guessing 80% of the time and working overtime to reduce the impact of the inevitable downside.

Knowledge

The most brilliant person in the world can live their entire life as a pauper.  Book smarts and head smarts are not effective for obtaining wealth on their own without action and calculated risk.

Knowledge can puff people up in their own minds and make them overconfident, taking action without calculating the risk, or it can cause analysis paralysis, calculating risk to the nth degree and taking action too late or never at all.

Knowledge is good, and it helps to be smart, but you don’t have to be a genius to become wealthy.

Behavior

Dave Ramsey, creator of Financial Peace University and best-selling author of The Total Money Makeover, talks about personal finances as being 20% head knowledge and 80% behavior.  Even if you aren’t a math major, you’d probably agree you could do more with $80 than with $20.  Four times as much.  Sometimes I just like to show of my math skills.

If there is any truth to this percentage split, then why on earth would we put so much emphasis on what we think we know instead of what we do?

Can anyone become wealthy (legally, you criminals) without saving at least some of their hard earned income?

Oh, of course, win the lottery.  Sure, they get a huge amount of money all at once, but it rarely makes them wealthy.  A quick online search turned up several articles citing the National Endowment for Financial Education as reporting 70% of windfall recipients end up broke.

70% is a lot closer to 80% than 20% if you catch my drift.  If you read the myriad articles about why lottery winners go broke, it’s pretty much all about their behavior.

Consider the following scenarios:

  1. Bob is a regular guy working hard to earn a decent income.  Bob decides at age 20 to save $100 a month for retirement and continues to do so until he reaches age 66, yielding an average 10% annual rate of return.
  2. Sam is also a regular guy working hard to earn a decent income.  Sam, however, has a plan.  At 20 years of age Sam starts spending $25 a week or $100 per month on lottery tickets, dreaming of that day when he’ll win the jackpot.  Of course, Sam wins sometimes, but breaking even is a long shot at best.  The odds are actually stacked against him ever breaking even. Yet he continues to play the lottery until he reaches age 66, and let’s say he hits a long shot and breaks even.

Can you guess which one retires wealthy?  Yep, it’s Bob.  Every time.

Bob invests a total $56,400 over 47 years and ends up with $1,151,000 in his retirement account at age 66.

If Sam breaks even, he ends up with the $56,400 he spent on lottery tickets and won back.

I like Bob’s way better, even if Sam hits the Jackpot.  Bob has built wealth through behavior and discipline and is not likely to lose his wealth.  Sam, however, has not developed the discipline or behaviors to use money wisely, and odds are he will lose everything long before he is ready to shuffle off this mortal coil.

Conclusion

Let the smart people take all the chances and risk losing everything while you stay disciplined and retire wealthy.